Malaysia’s election result: cautious optimism

Volatile proposition in the short term

By Jonathan Rogers

Viewpoint

FEW events in the political realm have been as exhilarating as the recent result of Malaysia’s general election, although the upsetting of the status quo has become a recent commonplace—from Brexit to the election of Donald Trump.

Of course, it may be a case in Malaysia of the more things change the more they stay the same.

From the point of view of debt and equity markets the expectation is that Malaysia presents a volatile proposition in the short term.

Offshore Malaysian debt and CDS widened by around 5bp-7bp following the victory of a coalition led by Dr Mahathir Mohammad on 9 May 2018, while local markets were shut for public holidays and will open on 14 May 2018.

Euphoria based on the toppling of the Barisan National coalition, which has reigned since the country gained independence in 1957, was widespread across the country. Yet the implications for financial assets remain ambiguous.

The country’s finances appear poor on many measures, with households stretched. This likely tipped the balance in favour of the Pakatan Harapan coalition in the election. Plus the country is running a budget deficit of 3% of GDP.

So euphoria and the sense of karmic justice which emerges from the ousting of Najib Razak, who is widely assumed to have taken vast sums of money from the balance sheet of government-owned investment company 1MDB, must give way to quantitative logic and a clear head.

The winning Mahathir-led coalition made some explicit election promises, central to which, within the first 100 days of the new administration, was the abolition of the hated 6% goods and services tax (GST). Najib introduced this in 2015 in the face of falling oil revenues. GST hit 17% of government revenue in 2017, circa 3% of GDP.

Moody’s thinks that scrapping GST could be credit negative for the country in the absence of measures to offset the loss of income. Najib estimated during the election campaign that it would accrete US$105bn-equivalent to Malaysia’s debt.

Still, I’m willing to parse the election result along positive lines, even though the early signs from the offshore markets have been negative. Market pundits have cited the 2% decline in ringgit NDFs together with a 6% decline in the iShares MSCI Malaysia ETF on 10 May 2018 as indicating that a post-election bear market is on the cards.

Short-term volatility seems a given, but in the medium to long run I am bullish on Malaysia. The return to solid governance and the rule of law which were compromised under Najib’s administration will likely provide a tailwind both for absolute government revenue and foreign direct investment.

I would be avoiding 1MDB debt which shed 11 points following the election result, on the basis that Mahathir is likely to focus on the company’s winding down as a symbolic element of the ousting of Najib and the BN coalition.

Meanwhile, as a measure of Malaysia’s credit market solidity I look to a private placement made just over a week ago by the Export-Import Bank of Malaysia (Mexim), which priced at Libor plus 85bp for five-year risk.

The spread on the placement was unchanged from previous PPs the quasi-sovereign issued at the end of 2017. I suspect that if Mexim were to tap again next week, the same spread could be achieved.

And, by extension, perhaps the first act of the newly minted administration in Malaysia should be to issue a large long-tenor benchmark offshore dollar deal just to show that electoral euphoria can be converted into a lower cost of term funding.